Dividend stocks can be a pillar of your investment portfolio, providing regular income and share-price stability if you find the right ones.
But you have to be careful in choosing your stocks. Just because a company pays a big dividend doesn’t mean it’s a good investment.
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“It’s really critical to be selective when buying dividend-paying stocks and chasing yield,” says Dan Lefkovitz, a strategist for Morningstar Indexes.
“Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps.”
He means “companies that have a nice-looking yield that is ultimately unsustainable. You have to really screen for dividend durability, reliability going forward.”
Morningstar came up with a list of 10 quality stocks with stable dividends that are trading below its fair value estimates.
- Blackstone (BX), the private equity titan;
- Cisco Systems (CSCO), the networking technology company;
- Comcast (CMCSA), the media/telecommunications company;
- Garmin (GRMN), the provider of global positioning systems;
- Gilead Sciences (GILD), the biotechnology stalwart;
- International Flavors & Fragrances (IFF), a specialty ingredients producer;
- Kellogg (K), the giant foods producer;
- Medtronic (MDT), the medical-device company;
- Public Service Enterprise (PEG), a utility;
- Verizon Communications (VZ), the telecommunications giant.
Cisco: Morningstar analyst William Kerwin assigns the company a wide moat (competitive advantage) and puts fair value for the stock at $56. It recently traded around $51. Dividend yield: 3.06%.
He just raised his fair-value estimate from $54 after Cisco released a “strong” quarterly earnings report and “terrific” guidance for the next six months.
“Cisco’s impressive guidance reflects an improving supply environment and durably strong demand,” Kerwin wrote in a commentary.
“Enterprise networking spending appears resilient against a backdrop of softening end markets elsewhere…. Cisco remains the pre-eminent heavyweight in enterprise networking.”
International Flavors & Fragrances: Morningstar analyst Seth Goldstein gives the company a wide moat and puts fair value for the stock at $140, 46% above recent trades at $96. Dividend yield: 3.37%.
The stock has underperformed since the beginning of 2022 and fell 19% on Feb. 8 after IFF cut earnings guidance due to declining volumes. “While we lowered our near-term estimates, we view the selloff as an overreaction to lower near-term profits,” Goldstein wrote Feb. 14.
“We view the current price as an excellent opportunity for long-term investors to pick up shares.”
Public Service Enterprise: Morningstar analyst Travis Miller assigns the company a narrow moat and puts fair value for the stock at $65. It recently traded at $62. Dividend yield: 3.69%.
The company has “completed its transition to a predominantly regulated transmission and distribution utility, much like its peers,” he wrote in a commentary.
“Its exit from the wholesale power generation business in early 2022, after more than two decades, reduces risk, improves its environmental profile, and should attract more income-oriented investors.”
The author owns shares of Blackstone, Cisco, Comcast, Medtronic, Public Service Enterprise and Verizon.
